The past year has been momentous for the investment industry by anyone’s standards. From the dramatic drops in all of the major indexes to the rapid rebound since March 2009, many investors have questioned more than ever before the wisdom of a “buy and hold” strategy and the volatility that accompanies it. Shouldn’t there be a way to time the market and avoid these big declines? In a recent article on the subject, Dan Richards notes “it's easy to understand market timing's appeal – after all, who wouldn't like to be invested in the stock market when it goes up and on the sidelines when it drops?”

Mr. Richards attests to the difficulty of market timing by posing this exercise, “Ask veteran investors to identify a manager who's been able to consistently get into and out of markets at the right time over an extended period – and you'll typically get silence and blank stares.”  Richards, Dan. “The Market Timing Trap.” Globe Investor Magazine 9 Sep. 2009.

In another article, Harold Evensky, past Chair of the International CFP® Council, made this statement relating to various investing strategies, “As for market timing, I can make this argument short and sweet. Name the ten most successful market timers of all time. How about the top five? The top one? I agree that if an advisor could consistently predict which markets would be up and which down, he would have to be pretty foolish to diversify. Why on earth would I invest in stocks if I knew the market was headed down? Had I posed my challenge back in the ’80s, many would have pointed to Joe Granville.

What, you haven’t heard of Joe Granville? Until the late ’80s, he was the market guru. Like many gurus, he had absolute confidence in his crystal ball. According to Robert Shiller in the book Irrational Exuberance, Granville was quoted by Time magazine as saying, “I don’t think that I will ever make a serious mistake in the stock market for the rest of my life,” and he predicted that he would win the Nobel economics prize. In 1981, when he was grossing $6 million a year for his newsletter advice, his two-word “sell everything” warning to his subscribers triggered a massive market sell-off with a record number of shares trading around the globe. Just before the 1987 crash, he again warned of a market disaster. He was obviously correct on that call and his picture was on the cover of major magazines and papers around the world.

Maybe you haven’t heard of him because his crystal ball, like others, had flaws. A few years ago, the Hulbert Financial Digest reported that The Granville Market Letter “is at the bottom of the rankings for performance over the past 25 years—having produced average losses of more than 20% per year on an annualized basis.”

Until someone can name at least a few successful long-time market timers, I remain a skeptic and will continue to “bet” on some form of diversification.” Evensky, Harold. “Maybe MPT Isn’t Dead?” Financial Advisor Magazine Aug. 2009.

The clear reality is the economy is an extremely complex system affected by thousands of factors. Even at times of significant market optimism or pessimism, it remains difficult, if not impossible, to pre-determine future prices with any precision. A so-called bubble can last for many years before prices collapse. Likewise, a crash can persist for extended periods; stocks that appear to be "cheap" at a glance can often become much cheaper afterwards before either rebounding at some time in the future or heading toward bankruptcy.

What’s a sensible investor to do? The answers that made sense last year still make sense today. Diversify – across sectors, countries, small and large stocks, growth and value. Match the risk level you’re comfortable with to the timeframe when you expect to spend the funds. If you need the money in a year it shouldn’t be in the stock market. If you won’t touch it for ten years there’s a high probability you will have made money (and likely a nice return) over that timeframe. Use high quality short term bonds for near term goals. High yield (junk) bonds lost significant amounts in 2008. High quality short term bonds had positive returns.

Together we can work together to deliver a rewarding investment experience over time, but if you’re looking for the crystal ball you’re likely to be disappointed. The good news is you don’t really need one.